Iran may use brief window to fill Libyan oil gap

Reuters , Wednesday 2 Mar 2011

Analysts expect short-term offloading of heavier crude stocks

Lost Libyan oil gives Iran a chance to sell off its shunned crude stored on tankers, but only in a brief time window before promised Saudi supplies sail to the rescue of anxious European refiners.

Lighter Saudi grades also make a better substitute for Libyan crude than heavier Iranian oil, which Tehran has struggled to sell as international sanctions limit its capacity to trade.

Violent unrest in Libya has brought its 1.2 million barrels per day exports to a near halt, driving oil to a two and half-year-peak last week of nearly US$120 a barrel and leaving European refiners at the mercy of alternative suppliers.

"While I would expect Iran to use the opportunity to draw down its floating stocks -- 25 million barrels by our count -- this doesn't go that far in replacing Libyan barrels," analyst Jamie Webster at PFC Energy said. "They don't have the capacity to take on Libya's obligations for too long, leaving plenty of room for Saudi."

Saudi Arabia, which holds the bulk of the world's spare capacity, has raised its output to around 9m barrels per day (bpd) and Saudi Aramco's CEO said this week all demands for extra crude had been met.

It has said it can provide similar crude to the high-quality light crude Libya typically provides.

Iran, OPEC's second biggest producer after Saudi Arabia, does not have that flexibility. Its available crude is heavier and more difficult to refine.

But it has one advantage in that barrels it has placed in floating storage are already near Europe's shores.

"I'd say their stocks are coming down as we speak," one crude trader based in the Gulf said. "For now, it is faster than Saudi Arabia ramping up, the stocks are there already." "But I don't think they'll have those customers asking for months," he said.

Typically, the shortest journey for Saudi crude loaded from its west to the Mediterreanean takes about 10 days, traders say. Saudi Arabia has said it can shorten the journey time.

Saudi sources said it could ship crude through its east-west pipeline and then to the Mediterranean and on to Europe.

Iran's opportunism in selling to needy European refineries is another instance of the survival strategies it has employed for years. Sanctions have been particularly problematic for it since the middle of last year when new international measures specifically targeted oil and gas trade.

Banks are reluctant refuse to open credit lines for cargoes destined for Iran and shipowners decline to carry them. Insurers refuse to provide cover. Sanctions, however, are never water-tight.

Cargoes of gasoline, needed by Iran to make up the shortfall because of its inadequate refinery infrastructure, still flow to Iran's Bandar Abbas port, traders and shippers in the Gulf say, or via land through Turkey and Iraq.

They are shipped via vessels chartered by front companies, some based in the United Arab Emirates.

"They (Iran) can handle it -- and with the premiums they pay for imported gasoline -- there are certainly some who are willing to make the passage across the Gulf to deliver," PFC's Webster said.

Iran paid a premium of around 25 per cent in mid-2010 for its imports from Turkey.

Price is also key for Iran's crude exports, traders say. For the right level of reward, some countries would be willing to take on the sanctions risk.

Italy had remained loyal to Iranian exports -- even before shipments from its major supplier Libya, meaning both parties have already found ways to adapt to the sanctions regime.

Latest data from Italy show the country imported 9.59m tonnes of crude oil from Iran in the first 11 months of 2010.

"It's difficult for a new player to take the heavier Iranian crude," said Alexander Poegl, consultant at JBC Energy. "It's always a question if you know how to work that type of crude in your refinery."

"So it'd probably be the usual suspects (buying Iranian crude) -- Italy and probably also France," he said.

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